Assessee companies failed to prove bank entries weren't theirs under Section 68, case remanded for fresh consideration

ITAT Delhi remanded appeals back to CIT(A) for fresh adjudication regarding additions under Section 68 of the Income Tax Act. The tribunal found that while CIT(A) determined the assessee companies were conduit entities providing accommodation entries, the appellate authority failed to verify whether ultimate beneficiaries were assessed on substantive basis and tax realized on bogus entries. The tribunal held that assessee companies did not discharge their burden of proving entries routed through their bank accounts were not owned by them. Without findings on taxability in beneficiaries' hands, the tribunal could not sustain or overturn CIT(A)'s decision, necessitating remand for proper consideration of all relevant facts.

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The core legal questions considered by the Tribunal in this group of appeals and cross-objections primarily relate to the validity and correctness of additions made under section 68 of the Income Tax Act, 1961, in the context of accommodation entries routed through the bank accounts of certain companies, and the maintainability of assessment and appellate proceedings where the companies concerned were struck off or later revived in the records of the Registrar of Companies (RoC). The issues can be enumerated as follows:

1. Whether additions under section 68 of the Income Tax Act can be sustained against companies found to be mere conduit or accommodation entry providers, lacking ownership of the credited amounts.

2. Whether commission income estimated by the Assessing Officer (AO) on such accommodation entries is taxable in the hands of the assessee companies or the actual controlling persons who allegedly earned such income.

3. The legal effect of the striking off of the companies from the RoC records on the validity of assessment orders passed against such companies.

4. The maintainability of appeals and cross-objections filed before the Commissioner of Income Tax (Appeals) and the Tribunal on behalf of companies that were struck off at the relevant time, including compliance with section 140 of the Income Tax Act regarding authorized representatives.

5. The procedural and substantive correctness of assessments framed under sections 153A and 153C of the Income Tax Act, particularly in relation to protective assessments and the requirement of incriminating documents to sustain such proceedings.

6. The burden of proof and onus on the assessee to establish ownership of the credited amounts and to demonstrate that the entries routed through their bank accounts do not belong to them.

7. The applicability of judicial precedents concerning the treatment of accommodation entries and the ownership of funds credited to the assessee's accounts.

Issue-wise detailed analysis:

Issue 1: Sustenance of additions under section 68 against conduit companies

The legal framework under section 68 mandates that where any sum is credited in the books of an assessee as share application money, share capital, or any sum, the assessee must explain the nature and source of such sum. Failure to satisfactorily explain may lead to the sum being treated as income. The AO made additions under section 68 on a protective basis, holding that the assessee companies were conduit entities merely routing accommodation entries through their bank accounts without ownership of the funds.

The AO's reasoning was that the companies were not the real owners of the credited amounts but merely facilitated the introduction of unaccounted funds for the actual beneficiaries. The first appellate authority (Ld.CIT(A)) reversed these additions, relying on the principle that ownership of the funds is a pre-condition for making additions under section 68. The Ld.CIT(A) observed that the AO did not make any conclusive finding that the assessee companies owned the credited amounts and that the funds belonged to other parties.

Judicial precedents were cited by the assessee's counsel, including a decision of the Calcutta High Court and a coordinate bench of the Tribunal, which held that additions under section 68 are not sustainable where the assessee is merely an accommodation entry provider and not the owner of the funds. The Tribunal noted that the Ld.CIT(A) relied on the remand report and bank statements showing immediate transfer of funds to other entities, indicating the modus operandi of accommodation entry providers.

The Tribunal, however, emphasized that while the Ld.CIT(A) correctly noted the lack of ownership by the assessee companies, it was incumbent on the Ld.CIT(A) to verify whether the ultimate beneficiaries of such entries had been assessed on a substantive basis and whether tax had been realized from them. The Tribunal observed that the Ld.CIT(A) did not consider this vital aspect, which is necessary to justify the deletion of additions in the hands of the assessee companies.

The onus under section 68 lies on the assessee to explain the nature and source of the credited amounts. The Tribunal noted that the corporate veil cannot be lifted cursorily and that the assessee had not discharged the burden to establish that the entries routed through its bank accounts were not owned by it. In absence of any finding on the taxability of the entries in the hands of the beneficiaries, the Tribunal found itself unable to sustain or dislodge the Ld.CIT(A)'s order and thus restored the appeals to the file of the Ld.CIT(A) for fresh adjudication.

Issue 2: Taxability of commission income estimated by AO

The AO estimated commission income purportedly earned by the assessee companies for facilitating accommodation entries. The Ld.CIT(A) reversed this addition on the ground that the commission income accrued to the persons managing and controlling the companies (Shri Anand Kumar Jain & Shri Naresh Kumar Jain) and not to the companies themselves.

The Tribunal concurred with the Ld.CIT(A) that since the companies were merely conduit entities and the commission income had been assessed in the hands of the controlling persons, the commission income addition in the hands of the companies was not sustainable. The principle that income assessed on the wrong person does not prevent the Revenue from assessing the right person was acknowledged. However, the Tribunal found that the AO had not established the commission income in the hands of the companies distinctly and thus upheld the Ld.CIT(A)'s deletion subject to fresh adjudication.

Issue 3: Legal effect of striking off and revival of companies on assessment validity

The assessee contended that the companies were struck off from the RoC records by an order dated 03.04.2017, rendering the assessment orders passed thereafter invalid. The Revenue countered that the companies were revived by an order of the National Company Law Tribunal (NCLT) dated 03.04.2019, and that the AO was entitled to frame assessments on the returns filed by the existing companies.

The Tribunal observed that the issue of maintainability of assessment and appellate proceedings in light of the companies' struck off and subsequent revival status required examination. It noted that appeals and cross-objections had been filed on behalf of former directors in contravention of section 140 of the Income Tax Act, which mandates authorized representatives for filing appeals. The Tribunal directed that these legal points be examined afresh by the Ld.CIT(A), including the status of the company at the time of issuance of notices and the applicability of relevant judicial precedents.

Issue 4: Maintainability of appeals and cross-objections filed on behalf of struck off companies

The Tribunal raised concerns regarding the authority of the persons who filed appeals and cross-objections on behalf of companies that were struck off at the relevant time. The former directors had signed the appeal memos in the absence of any alternative, which is a departure from the provisions of section 140 of the Income Tax Act.

The Tribunal found this issue significant and intertwined with the merits of the appeals and cross-objections. It directed that the Ld.CIT(A) consider the maintainability of such appeals and cross-objections in accordance with law, giving due opportunity to the parties.

Issue 5: Procedural and substantive correctness of assessments under sections 153A and 153C

The assessments were framed under sections 153A and 153C, which relate to search and seizure proceedings and assessments based on incriminating material found. The assessee challenged the maintainability of proceedings under section 153C on the ground that no incriminating documents were related to the additions made.

The Tribunal noted that complete facts were not placed before it to decide on this aspect and that the Ld.CIT(A) should examine the issue afresh during the remand proceedings.

Issue 6: Burden of proof on the assessee to establish ownership and nature of credited amounts

The Tribunal reiterated the settled legal position that the burden under section 68 lies on the assessee to satisfactorily explain the nature and source of credited sums. The Ld.CIT(A) had found that the AO did not conclusively establish ownership of the credited amounts by the assessee companies. However, the Tribunal emphasized that the Ld.CIT(A) should have ensured that the ultimate beneficiaries had been assessed and taxed on such entries before deleting additions in the hands of the assessee companies.

This nuanced approach was considered necessary to balance the rights of the Revenue and the assessee and to avoid the Revenue's attempt to tax the same income twice or allow escape from tax by mere conduit entities.

Issue 7: Applicability of judicial precedents

The Tribunal considered judicial precedents relied upon by the parties, including the Calcutta High Court decision and coordinate bench rulings of the Tribunal, which held that additions under section 68 cannot be sustained against accommodation entry providers lacking ownership of the credited amounts. The Tribunal acknowledged these principles but stressed the need for a holistic examination of whether the actual beneficiaries had been assessed.

Significant holdings:

"It is settled position of law that the ownership of the funds is a pre-condition for making additions of the credits and therefore, unless the AO makes the actual finding that the assessee itself was the owner of the money, the additions of the credits cannot be made."

"The onus lays on the assessee companies to establish that entries routed through the bank account of such companies are not owned by them. The corporate veil cannot be lifted cursorily. The onus has not been discharged by the assessee at all."

"In the absence of any finding on the taxability of entries in the hands of beneficiaries, we are not in a position to either sustain the action of the Ld.CIT(A) or dislodge the action of the Ld.CIT(A). It will thus equitable to restore the appeal to the file of the Ld.CIT(A) for adjudication afresh in accordance with law."

"The authority of the assessee before the Ld.CIT(A) to file appeal on behalf of the non-existent company calls for examination to ascertain the maintainability of the appeals before the Ld.CIT(A)."

"The Ld.CIT(A) shall determine various issues reflected in the Revenue's appeal as well as in the cross-objections in accordance with law after giving reasonable opportunity to the assessee."

In conclusion, the Tribunal restored all the captioned appeals and cross-objections to the file of the Ld.CIT(A) for fresh adjudication in accordance with law, emphasizing the necessity for a thorough examination of ownership of funds, taxability of beneficiaries, maintainability of proceedings, and compliance with procedural requirements. The Tribunal allowed the appeals and cross-objections for statistical purposes, leaving the substantive issues open for fresh consideration.

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